from Global Investing:
EM growth is passport out of West’s mess but has a price, says “Mr BRIC”
Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O'Neill. O'Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China's economy is growing by $1 trillion a year and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece? Italy's economy was surpassed in size last year by Brazil, another of the BRICs, O'Neill counters, adding:
"How Italy plays out will be important but people should not exaggerate its global importance. In the next 12 months the four BRICs will create the equivalent of another Italy."
Emerging economies are cooling now after years of turbo-charged growth. But according to O'Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent, a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.
"Post-crisis, these countries will be our passport out of this mess."
But there has to be a payoff for this kind of increased financial clout, he warns. Developing countries are increasingly disgruntled about the the richer world's strangehold on global policies via the International Monetary Fund and the World Bank and most have responded coolly to the call for additional funds for the IMF which is fighting to stem the euro zone malaise. An attempt last year to install a representative of the developing world at the helm of the IMF for the first time ever fell apart, with Europe retaining the position. But emerging countries could make a bid for the World Bank chief's position this year, a position traditionally held by a U.S. citizen. O'Neill said the West had to bow to the new reality:
"You can't have it both ways...This game of 'You have the IMF and I have the World Bank' has to stop or these institutions are going to lose their relevance."
He is also dismissive of fears China is headed for a so-called hard landing, a sharp slowdown of growth, potentially leading to unemployment, a property crash and social unrest in the world's No. 2 economy. "A lot of people (in the West) want China to have a hard landing, " he said. "And that's because it isnt us."
from Global Investing:
Retail volte face confirms India as BRIC that disappoints
Jim O'Neill, the Goldman Sachs banker who coined the term BRICs to capture the fast-growing emerging-markets quartet of Brazil, Russia, India and China, has fingered India as the BRIC that has disappointed the most over the past decade in terms of reforms, FDI and productivity. New Delhi's latest decision to put on hold a landmark reform of its retail sector will only confirm this view.
The government's backtracking on plans to allow foreign investment in supermarkets will not surprise those accustomed to New Delhi's record on key economic reforms. But it means India's weak performance on FDI receipts will continue and that's bad news for the worsening balance of payments deficit. Speaking of the retail volte face, O'Neill said: "They shouldn’t raise people's hopes of FDI and then in a week, say, 'we’re only joking'".
Various Indian lobby groups that oppose the reforms contend that foreign giants such as Wal-Mart and Tesco will kill off the livelihoods of millions of small traders.
Not so, according to a study by the Vale Columbia Centre for Sustainable Economic Development, a think-tank that studies FDI trends. The Centre's Nandita Dasgupta notes that many emerging economies that have allowed 100-percent foreign participation in retail since the early 1990s have seen encouraging results. These include Argentina, Brazil, Chile, Russia, China, Indonesia, Malaysia and Thailand. In China, FDI in retail was permitted 20 years ago. But there is no evidence the huge investments have hurt mom-and-pop operations or domestic retail chains, Dasgupta says. In fact, since 2004 the number of small Chinese outlets has increased to around 2.5 million from 1.9 million. Between 1992 and 2001, employment in retail and wholesale almost doubled to 54 million.
In Indonesia, where FDI to retail was liberalised 10 years ago, 90 percent of the business remains with small traders, Dasgupta points out.
At present, insufficient cold storage, poor transportation and distribution infrastructure allows half of India's fresh produce to rot. An organised retail sector can create a proper farm-to-fork infrastructure through direct purchase from farmers. India's 700 million poor are the ones bearing the brunt of double-digit food price inflation -- the status quo is the worst option for them.
from Global Investing:
Emerging consumers’ pain to spell gains for stocks in staples
Food and electricity bills are high. The cost of filling up at the petrol station isn't coming down much either. The U.S. economy is in trouble and suddenly the job isn't as secure as it seemed. Maybe that designer handbag and new car aren't such good ideas after all.
That's the kind of decision millions of middle class consumers in developing countries are facing these days. That's bad news for purveyors of everything from jeans to iphones who have enjoyed double-digit profits thanks to booming sales in emerging markets.
Brazil is the best example of how emerging market consumers are tightening their belts. Thanks to their spending splurge earlier this decade, Brazilian consumers on average see a quarter of their income disappear these days on debt repayments. People's credit card bills can carry interest rates of up to 45 percent. The central bank is so worried about the growth outlook it stunned markets with a cut in interest rates this week even though inflation is running well above target
All that bodes ill for shares in companies selling so-called consumer discretionaries in developing countries -- non-essential items such as autos and high-end cosmetics.
But someone's loss is someone's gain. Shares in companies selling consumer staples --food, beverages, prescription meds and tobacco -- are starting to pick up. In short, everything that outperforms during economic downturns. MSCI's index of emerging market staples is flat on the year, doing only slighly better than consumer discretionaries. But guess what? In August, when everything was selling off staples did ok. They fell 2.4 percent, much better than MSCI's discretionaries index which lost 8 percent.
Bank of America/Merrill Lynch's monthly survey shows fund managers went overweight consumer staples in August for the first time this year. Back in January when investors were optimistic about the U.S. economic outlook, almost 60 percent of fund managers were underweight staples. They still like discretionaries but cut that position pretty sharply last month.
What of Brazil? Carlos de Leon, a fund manager at RCM still sees opportunities there, especially as minimum wages will rise by an above-inflation 12 percent next year. But unsurprisingly, his picks are consumer staples and defensives including toll road operators, fuel distributors and utilities.
Give me liberty and give me cash!
Come back Mr Fukuyama, all is forgiven.
In his 1992 book “The End of History and the Last Man”, American political scientist Francis Fukuyama famously argued that all states were moving inexorably towards liberal democracy. His thesis that democracy is the pinnacle of political evolution has since been challenged by the violent eruption of radical Islam as well as the economic success of authoritarian countries such as China and Russia.
Now a study by Russian investment bank Renaissance Capital into the link between economic wealth and democracy seems to back Fukuyama.
Looking at 150 countries and over 60 years of history, RenCap found that countries are likely to become more democratic as they enjoyed rising levels of income with democracy virtually ‘immortal’ in countries with a GDP per capita above $10,000.
” Only five democracies above the $6,000 income level have died. Even democracies above the $6,000 level have a 99 percent chance of sustaining their political system each year. The only exceptions were the military coups in Greece in 1967 ($9,800), Argentina in 1976 ($8,180) and Thailand in 2006 ($7,440), and the events in Venezuela in 2009 ($9,115), as well as Iran in 2004 ($8,475),” RenCap global chief economist Charles Robertson writes.
The $6,000 per capita GDP seems to be a crucial level, marking the point where a country is likely to shift to democracy. Tunisia, which early this year triggered the wave of uprisings against autocracy across the Arab world, recently crossed that threshold.
Conversely, democracy is most fragile at the lowest income levels and when incomes are shrinking. The world’s populous democracy, India, is a notable exception as its per capita income was under $800 from 1950-1967, and only exceeded $2,000 in 2003.
India’s central bank battles alone in inflation struggle
What more does India’s central bank have to do? Last week data showed March inflation rising to almost 9 percent on an annual basis. More importantly, core inflation is above 7 percent for the first time in 3 years meaning demand-side pressures are rising fast. And that’s despite the Reserve Bank of India raising interest rates eight times since last March.
The inflation data comes just after a quarterly HSBC report based on purchasing managers indexes showed that inflation in India seemed impervious to monetary policy tightening.
The truth, is the inflation-fighting central bank has little backup from the government which remains stubbornly in spending mode. Its foot-dragging on reform and foreign investment contributes towards keeping food price inflation high. This year’s fiscal deficit target is 4.8 percent of GDP and even this is seen as optimistic.
“What India really needs is to have domestic demand slowing down quite rapidly but the government is not prepared to risk that,”says Claire Dissaux, investment strategist at Millenium Global in London.
The RBI has repeatedly said it shouldn’t have to do all the heavy lifting. But lack of support from the government means the central bank will have to put up rates another 100 bps this year, analysts reckon.
Of course India is not alone in this bind though it is the most extreme example of lax fiscal policy being counterbalanced by tight monetary policy. Brazilian interest rates are among the highest in the developing world at 11.75 percent and that is down to loose fiscal policy, a lot of it “quasi-fiscal spending” via the state development bank BNDES, research house Capital Economics says.
Brazil’s central bank suggested recently that fiscal tightening of one percent of GDP would have the same impact as 125 bps of interest rate hikes.
from Davos Notebook:
Will Goldman’s new BRICwork stand up?
Jim O'Neill, the Goldman Sachs economist who coined the term BRICs back in 2001, is adding four new countries to the elite club of emerging market economies. But does his new edifice have the same solid foundations?
In future, the BRIC economies of Brazil, Russia, China and India will be merged with those of Mexico, Indonesia, Turkey and South Korea under the banner “growth markets,” O'Neill told the Financial Times.
Hmmm. Doesn't quite grab you like BRICs, does it? The Guardian helpfully offers an amended branding banner of "Bric 'n Mitsk" (geddit?). But which ever way you cut it, it's hard to see a flood of investment conferences and funds floating off under the new moniker.
Ten years ago, Goldman had this field to itself. Now more and more acronyms are being bandied around by banks seeking to pique investors' appetite for higher returns.
Goldman has already launched the N-11, or Next Eleven countries, and other contenders include the VISTA economies (Vietnam, Indonesia, South Africa, Turkey and Argentina), the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) and the EAGLES (Emerging and Growth-Leading Economies).
So far, none of them have really caught on. One thing you can bank on: the term BRIC will still score highly in any tally of the millions of words that will issue forth from Davos next week.
from Global Investing:
Which BRIC? Russia scores late goal for 2010
How quickly times change. Russia's stock market, unloved for months, last week overtook India to be the best-performing of the four BRICs. The Moscow stock index jumped 5 percent last week, posting its biggest weekly rise in seven months, bringing year-to-date gains to 17.5 percent. Fund managers such as Goldman Sach's Jim O'Neill, creator of the BRICs term, are predicting it will lead the group next year too.
So what's with the sudden burst of enthusiasm for Moscow? One catalyst is of course soccer body FIFA's decision to award the 2018 Soccer World cup to Russia. Investors are piling into infrastructure stocks, with steel producers especially tipped to benefit as Russia starts building stadia, roads and hotels. But the bigger factor, according to John Lomax, HSBC's head of emerging equity strategy, is the optimism that has started creeping in about U.S. -- and world economic growth.
Some of that may have been dampened by Friday's lacklustre U.S. jobs data. But overall, checks of U.S. economic vital signs show the economy looking sturdier than it was six months ago and most banks, including the pessimists at Goldman Sachs, have upped 2011 growth forecasts for the world's biggest economy. And China and India are continuing to grow at rates close to 10 percent. All that is great news for the commodity and oil stocks -- the mainstay of the Russian market. Merrill Lynch, for instance, expects oil prices to be $10 higher by next December than now.
"Investors are getting more confident about the cyclical upturn," Lomax says, citing oil prices and the recent rise in U.S. yields. "So you want to be in Russia which is a global growth play."
The icing on the cake is the price of Russian stocks. They trade around 6 times 2012 earnings compared to 10 times for emerging stocks as a whole. Goldman's O'Neill points out fellow-commodity exporting BRIC, Brazil, trades at much higher valuations while the currency too is more expensive. And India, this year's runner-up is likely to suffer from a double whammy of high inflation and extremely high valuations -- Mumbai trades at 16-17 times 2012 earnings.
Building BRICs in Africa
Some eye-catching numbers from Standard Bank out today on the influence of BRICs countries — Brazil, Russia, India and China — on Africa.
First off, the bank says the global recession and its recovery have been nourishing these so-called South-South ties. But it is all now ready to take off. The bank estimates:
– By 2015, BRIC-Africa trade will have incresed threefold, to $530 billion from $150 billion this year.
– BRICs share of Africa’s total trade will increase from one-fifth today to one-third in the next five years.
– BRICS foreign direct investment stock in Africa will swell to more than $150 billion from around $60 billion today.
Standard Bank bases these assertions partly on estimates for BRICs growth over the next five years — eg, domestic output, global output and a doubling of BRICs trade with the world in general. But it also sees Africa growing rapidly — for example, a per capita real annual growth rate of 5.7 percent between now and 2015, and a doubling of private consumption in Africa’s 10 largest economies. And it adds:
Crucially, a host of global-minded corporates is emerging from the BRICs. In 2010 231 (11.5 percent of the total) companies listed in the Forbes Global 2000 originated in the BRICs, up from only 83 companies (4 percent) in 2005. Recent trends are a harbinger of deeper potential.
from Global Investing:
What worries the BRICs
Some fascinating data about the growing power of emerging markets, particularly the BRICs, was on display at the OECD's annual investment conference in Paris this week. Not the least of it came from MIGA, the World Bank's Multilateral Investment Guarantee Agency, which tries to help protect foreign direct investors from various forms of political risk.
MIGA has mainly focused on encouraging investment into developing countries, but a lot of its latest work is about investment from emerging economies.
This has been exploding over the past decade. Net outward investment from developing countries reached $198 billion in 2008 from around $20 billion in 2000. The 2008 figure was only 10.8 percent of global FDI, but it was just 1.4 percent in 2000.
Not surprisingly, the lion's share comes from the BRICS -- Brazil, Russia, India and China -- which together made up 73 percent of outflows last year. BRIC outward investment jumped to $144.3 billion in 2008 from $29.6 billion three years earlier.
Perhaps the most interesting data, however, concerned political risk insurance. MIGA studied the kind of insurance BRICs outward investors were taking to see what kind of things worried them.
Brazil had a mixed of concerns, but Indians were most worried about transfer and convertibility restrictions, the Chinese concerned themseves with war and civil disturbance and Russians were extremely worried about breaches of contract.
Sceptics might be tempted to see this as a reflection of national concerns. But MIGA said it was more micro than that. Russian investment, for example, is dominated by commodity exploration, an area said to be more subject to contract problems than others.
from Global Investing:
Time to kick Russia out of the BRICs?
It may end up sounding like a famous ball-point pen maker, but an argument is being made that Goldman Sach's famous marketing device, the BRICs, should really be the BICs. Does Russia really deserve to be a BRIC, asks Anders Åslund, senior fellow at the Peterson Institute for International Economics, in an article for Foreign Policy.
Åslund, who is also co-author with Andrew Kuchins of "The Russian Balance Sheet", reckons the Russia of Putin and Medvedev is just not worthy of inclusion alongside Brazil, India and China in the list of blue-chip economic powerhouses. He writes:
The country's economic performance has plummeted to such a dismal level that one must ask whether it is entitled to have any say at all on the global economy, compared with the other, more functional members of its cohort.
I have just returned from Moscow, which is always dreary around this season. But this year, the mood among the capital's eloquent liberal economists has hit a new low. For the last seven years, Russia has undertaken no significant economic reforms. Instead, the state has been living off oil and gas, like a lucky but undeserving rentier."
Economically, Åslund has the numbers on his side. The International Monetary Fund estimates that the Russian economic will contract by 6.7 percent this year, while China will grow 8.5 percent and India 5.4 percent. There is less of a case for Brazil, with a contraction of 0.7 percent projected, but it is still doing far better than Russia.
But the BRICs concept is not just about economics. As mentioned, it is a marketing device to urge investors to focus on the big emerging players. From an investment standpoint, it could be argued that Russia is leading the BRICs. Its stock market is up 128 percent this year versus around 80 percent for the other three.
At very least, however, Russia's economic underperformance and stock market outperformance does suggest it is the outlier of the group.
